Smith Douglas Homes Corp. 2026 Q2 Earnings Call

We issued a press release this morning outlining our results for the second quarter of 2026, which we will discuss on today's call, which can be found on our website at investors.smithdouglas.com or by selecting the investor relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the investor relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties, and other important factors as detailed in the company's SEC filings.

Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Greg.

Good morning. Thank you for joining us today for a review of our business results for the second quarter of 2026 an update on industry conditions and our company's outlook. Smith Douglas Homes continued to make progress towards our goal of becoming a large-scale builder in the Southeastern and Southern United States, posting strong year-over-year growth in both net new home orders and home closings in the second quarter. We generated $273 million in home closing revenue for the quarter, representing a 22% increase over the second quarter of 2025 on 839 home closings and an average sales price on closed homes of $325,000. Home closing gross margin for the quarter averaged 17.6% on a GAAP basis, or 18.7% when you exclude the impact of $3.1 million of inventory impairments included in the cost of home closings.

Our pre-tax profit came in at $1.9 million for the quarter, or $9.5 million when adjusting for impairments and lot option contract abandonment charges. Overall, our company executed well in the quarter against the home building backdrop that continues to be marked by uncertainty and affordability challenges for new homebuyers. Despite this uncertainty, we were able to post net new home quarter growth of 32% on a year-over-year basis for the quarter for a total of 970 net new home orders, as our team did an excellent job working with buyers to find the right combination of price, personalization, and value to keep our production-oriented building model running smoothly. We saw consistent traffic and a relatively stable sales pace throughout the quarter, averaging roughly three sales per community per month, which we maintained through a targeted use of sales incentives.

Our construction cycle time for homes closed averaged 55 days as we continue to emphasize construction efficiency across our home building platform. This remains a key component of our returns-focused business model and one we feel differentiates our company from the competition. Not only does this discipline allow us to work through our communities efficiently, but it also shortens the time between sale and close, which helps reduce the possibility of cancellations. We continued to expand our presence across our markets. We grew quarter-end community count by 20% on a year-over-year basis to 110 active communities. We know higher volume will lead to better expense leverage over time. At the same time, we remain disciplined on our land acquisition front by adhering to our underwriting standards and walking from deals that do not meet those standards.

We maintain this balance through our land lot strategy, which allows us to control a pipeline of lots through options and land banking agreements while also providing us downside risk protection. At the end of the second quarter, we had a total of 22,319 unstarted controlled lots, with only 3% of those lots owned on our balance sheet. As we turn our focus to the back half of the year, we feel cautiously optimistic about the state of the home building industry and our company's positioning. The U.S. consumer has proven to be resilient in the face of rising rates and macroeconomic uncertainty while building conditions continue to be favorable. We see better discipline from builders in terms of spec inventory and through selective and targeted financial incentives to buyers, we continue to be able to compete well against the existing home market.

As a result, I remain confident in our long-term outlook for Smith Douglas Homes. Finally, I want to once again recognize and thank our team members for their continued dedication and hard work. Their commitment to serving our customers, executing our strategy, and adapting to a dynamic operating environment has been instrumental to our success. On behalf of the entire leadership team, I want to express our sincere appreciation for everything they do. Now I'll turn the call over to Russ, who will provide more detail on our financial results this quarter and give an update on our outlook.

Thanks, Greg. Good morning. I'll highlight our results for the second quarter, then conclude my remarks with an update on our balance sheet, capital allocation priorities, and outlook for the third quarter. We finished the second quarter with $273 million in revenue on 839 closings, with closings up 25% from the year-ago period and an average sales price of $325,000. Our home closing gross margin was 17.6% on a GAAP basis and adjusted home closing gross margin was 19%, which excludes capitalized interest and inventory impairments. Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price discounts, and the cost of forward commitments totaled 780 basis points, which compared to 480 basis points in the year-ago period and 730 basis points sequentially from the first quarter.

Selling, general and administrative expenses for the quarter were $41.9 million or approximately 15.4% of revenue, up $7.2 million compared to the same period last year and down slightly as a percent of revenue. The increase primarily reflected higher sales commissions and advertising costs associated with higher closings and the investments related to our Dallas-Fort Worth and Alabama Gulf Coast expansions. Pre-tax income for the quarter was $1.9 million, resulting in net income of $1.8 million or $0.03 per diluted share. Our second quarter results included $3.1 million of inventory impairment charges in cost of home closings and $4.5 million of lot option contract abandonment charges and other expense.

Adjusted EBITDA, which we believe provides a clean apples-to-apples view of our operating performance as it excludes share-based payment expense, inventory impairments, and lot option contract abandonment charges, among other items, was $13.4 million or 4.9% of revenue, compared to $19.8 million or 8.8% of revenue in the same period last year. Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the non-controlling interest of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations.

For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 26.9% as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was $1.4 million, compared to $12.9 million in the same period last year. Turning to orders, we generated 970 net new home orders during the quarter, an increase of 32% versus the year-ago period. Year to date, we have generated 1,951 net new home orders, up 30% from the prior year period. We ended the quarter with 1,000 homes in backlog, up 17% from the year-ago period, with a contract value of $322.1 million and an average sales price of $322,000. In addition to backlog, we also had 74 home reservations at the end of the quarter.

These reservations allow our buyers to take advantage of buying a built-to-order home while also benefiting from a guaranteed mortgage rate when they close. We expect most of these reservations to convert to new home orders in the third quarter. Turning to the balance sheet, we remain focused on preserving financial flexibility while continuing to invest in our growth. We ended the quarter with $14.2 million of cash and $66 million of total debt. Our $325 million unsecured revolving credit facility had $63 million of outstanding borrowings and $0.8 million of letters of credit at quarter-end. Our debt to book capitalization was 13.2% and net debt to net book capitalization was 10.7%, compared with 9% and 6.6% respectively at year-end 2025. Net debt was $51.8 million at quarter-end. Importantly, our balance sheet has continued to improve as we scale operations even in this difficult housing environment.

Despite increasing active communities by 20% from 92 at the end of the second quarter of 2025 to 110 at the end of this quarter and growing our closings 25%, our total debt was down 11%, and on a per community basis, total debt declined 25%, while real estate inventory per community declined 14% from a year ago. These metrics highlight the efficiency of our business model and ability to effectively manage our balance sheet while at the same time growing our business. Our land-light strategy remains a core component of this performance. At quarter-end, we controlled 23,527 lots, including 1,208 homes under construction, 664 owned lots, and 21,655 option lots. By relying primarily on third-party lot developers and option agreements, we can align lot delivery with demand, maintain flexibility, and deploy capital efficiently.